what does a us tax professional need to know about vat
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What Does a US Tax Professional Need to Know about VAT. COST Canadian Tax Workshop for U.S. Companies October 2nd, 2014. James Freed - KPMG LLP – Chicago Karl Frieden - Council On State Taxation, Washington DC. Agenda. Overview of Global VAT VAT Compared to Retail S ales T ax - PowerPoint PPT PresentationTRANSCRIPT
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What Does a US Tax Professional Need to Know about VAT
COST Canadian Tax Workshop for U.S. CompaniesOctober 2nd, 2014
James Freed - KPMG LLP – ChicagoKarl Frieden - Council On State Taxation, Washington DC
Agenda
Overview of Global VAT VAT Compared to Retail Sales Tax VAT Terminology and Rates – a Recap Global VAT Risk and Management Will the U.S. Continue to be “Tax Exceptional”?
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Overview of Global VAT
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Growing Importance of VAT
VAT is a concern for companies doing business globally Many governments are shifting the emphasis from taxing
earnings and gains to taxing consumption Many governments use VAT as first tool in fiscal policy
− Reduce to stimulate consumption− Increase to reduce deficits
Almost 160 countries have a VAT regime− U.S. is only OECD country without VAT− In Canada, regime is known as GST/HST− Other countries considering VAT include many in the Middle
East EU average VAT rate is above 21.5% (and rising) Trend is towards increasing rates and anti-avoidance
measures to defend yields and reduce the “tax gap”
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VAT Enactments Timeline
1969 1974 1979 1984 1989 1994 1999 2004 20092014+
11 21 24 34 47 92 123 137 152>160
Countries Countries Countries Countries Countries Countries Countries Countries Countries Countries
Source: OECD, Consumption Tax Trends 2012; WNT Research
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Shift to Indirect Taxation
OECD Tax Revenue by Sector as Percentage of Total
Source: OECD, Revenue Statistics1965 1970 1975 1980 1985 1990 1995 2000 2005 2011
0
5
10
15
20
25
30
35
Personal income tax
Corporate income tax
Social security contributions
Property taxes
VAT
Sales tax
Other consumption taxes
Evolution Average Standard VAT Rates in the EU
Source: European Commission, VAT Rates in the EU, July 2014
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201418.0%
18.5%
19.0%
19.5%
20.0%
20.5%
21.0%
21.5%
22.0%
Evolution average standard VAT rate in the EU
VAT Compared to Retail Sales Tax
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VAT vs. Sales and Use Tax
VAT is imposed at the national government level whereas Sales and Use taxes are generally imposed at the sub-national level − Any U.S. consideration of VAT would necessarily involve issues of
coordination with state and local sales taxes− Canada and India (proposed) are examples of multi-level VATs in a
federal system− India (current) and Brazil deal with multiple levels largely by dividing
(as opposed to sharing) tax bases
VAT rates are typically high in comparison to Sales and Use tax rates− Standard VAT rates between 15%-27% vs. average Sales and Use
tax rates of around 7.5%− VAT does have reduced rates, super reduced rates for certain
categories of products/services and zero rates
VAT vs. Sales and Use Tax (cont.)
VAT generally applies to inter-company relationships whereas Sales and Use tax frequently exempts inter- company transactions (as sale for resale or exempt transactions)
− VAT grouping in certain countries allows disregarding inter- company transactions for VAT
VAT typically applies to a much broader tax base of goods and services whereas Sales & Use tax generally only applies to goods and a limited number of services − When properly designed with full input tax recapture through
credits, VAT allows taxation of all transactions without burdening business inputs
− Burden of tax falls on final consumption− Avoids “errors” of current sales taxes and the impact on business
inputs that have “doomed” efforts to extend sales tax to service transactions
VAT vs. Sales and Use Tax (cont’d)
VAT refers to “place of supply rules” to determine where VAT is due, whereas Sales and Use tax generally refers to “nexus” for jurisdictional rules. − Collection obligation under VAT generally determined by turnover
or receipts from within a jurisdiction.− There is no “physical presence” limitation placed on the collection
of VAT compared with the “Quill” restrictions on sales and use taxes
VAT is a multi stage consumption tax whereas Sales and Use tax is typically only levied at point of final consumption− Companies have to manage both output tax and input tax
Collect and remit output tax Claim refund of input tax (if allowed)
− VAT under “management” is on average 30 to 35 percent of a company’s non-US revenues. For example, a company with $10 billion in non US sales will have approximately $3 billion of
VAT under management.
VAT Terminology and Rates – a Recap
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VAT Terminology
Note the focus on movement on goods/services, rather than movement of money
• VAT charged by businesses on sales made to their customers• “Output” meant to reflect outgoing sales
Output Tax
• VAT spent by businesses on qualifying business expenditures• “Input” meant to reflect incoming purchasing
Input Tax
• VAT terminology for a “sale”• Goods: tangibles; Services: intangibles
Supply
• Payment received in return for the supply of goods or provision of services• According to the EU, “everything received in return for the supply of goods
and services, …”Consideration
• Situation in which seller of services (usually foreign) is not liable for VAT, and instead buyer is required to account for VAT; commonly applied on intra-EU transactions
Reverse
Charge
Mechanism
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VAT Rates
• EU VAT rates range from 15% to 27%. Average EU VAT rate is above 21.5%—somewhat less in ASPAC and LATAMStandard
• Any rate lower than the standard rate• E.g., basic food stuff, books—usually political decisionReduced
• No VAT is charged, but seller has a right to credit input tax• E.g., exported goods and services• Aka “Exempt with credit”
Zero-rated
• No VAT is charged, but the seller has NO right to credit input tax• E.g., certain financial, medical and education services• Aka “Exempt without credit”
Exempt
• Not within the scope of VAT in the jurisdiction concerned• E.g., charities and non-business
Outside Scope
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Global VAT Risk and Management
Impact of Effective VAT Risk Management
VAT is a transaction tax – must be considered for every purchase (input VAT) and every sale (output VAT), and even some movements of own goods between some countries and states− The total amount of output and input VAT managed by a
company represents the “VAT through-put” Not simply an “in and out” tax, as not all VAT may be
recoverable
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VAT Throughput
Example (fully taxable business)
In millions, USD:
Sales $5,000
Purchases (3,000)
Salaries (1,000)
Transfer price adjustments (500)
Net Income 500
Income Tax (30%) 150
Total Output VAT (rate 20%) 1,000
Total Input VAT (rate 20%) 600
Total VAT flow through the business 1,600(*)
(*) Total VAT represents 28 percent of company gross sales (including price adjustments)
Global Challenges
VAT credits vs. refunds
Cashflow VAT
system
Import restrictions
Multiple indirect taxes
and jurisdictions
Difficulties with VAT refunds
Importer of record must be owner to recover VAT
Proposed reform
Current reform
Proposed introduction
Import valuation
issues
Various rate changes
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Reform in 2015
EU – Sourcing changes for 2015
What Happens if You Get it Wrong?
Underpaid VAT liability
Budget plans inadequate to cover unexpected VAT costs
Financial losses e.g., the VAT becomes a real cost if irrecoverable or never paid out by the tax authorities
Penalties and interest imposed by authorities can be up to 200% of the tax due, if not mitigated
Closer future scrutiny of processes by the tax authorities
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What Happens if You Get it Wrong? (Cont’d)
The impact of material VAT liabilities on financial statements
Damage to business relationships− Customers being assessed for incorrectly charged VAT
recovered on purchases− Raising VAT-only invoices in attempt to mitigate own
liability Cost of correction
− System updates/implementations− Evaluation of errors and reporting outputs
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Will the U.S. Continue to be “Tax
Exceptional”?
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Taxes as a Percent of GDP – 2012
Source: OECD Tax Revenue Statistics, January 17, 2014
Mexico*
Chile
United States
Australia*
Korea
Turkey
Switzerland
Ireland
Slovak Republic
Japan*
Canada
Poland
Estonia
Portugal*
New Zealand
Spain
Greece
OECD*
Czech Republic
United Kingdom
Iceland
Germany
Luxembourg
Netherlands*
Hungary
Norway
Austria
Finland
Sweden
Italy
Belgium
France
Denmark
0 10 20 30 40 50 60
The U.S. has a low tax burden (combined fed-eral, state and local) relative to Gross Do-mestic Product.
*= 2011 Data
Tax Revenue Distribution – 2012 Taxes by Type as Percent of Total Taxes
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Income Social Security Property Consumption
Source: OECD Tax Revenue Statistics, January 17, 2014
The U.S. relies relatively more on income taxes and significantly less on consumption taxes than other OECD countries
Long-Term Budget Outlook is Still a Concern
2013 2023 20380%
5%
10%
15%
20%
25%
30%
Components of Federal FinancesAs Percent of GDP
Interest
Health
Soc. Security
Other
20.8% 21.8%
26.2%
-- Revenues
19.7%
18.5%17%
Calculations based on Congressional Budget Office, The 2013 Long-Term Budget Outlook, revised October 2013
Contact Information
Karl Frieden
Vice President and General Counsel
Council On State Taxation
202.484.5215
James Freed
Senior Manager
KPMG LLP
312.665.2627
Thank You
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